tags : UK quantitative easing bank of england

So it was on the news this morning about Britain's plans to print money to pump into the economy. Can someone tell me, is currency subject to the general laws of supply and demand and if so, would printing loads of it not cause hyper-inflation? I was always of the belief that printing money doesn't actually generate value; surely if it did then governments could just create value to their heart's content. So what is the benefit of it? Or can a government generate value to a point? (I say "value" but maybe "worth" would be a better term)

Is printing currency not what caused hyper-inflation in Zimbabwe and inter-war Germany?

It is but they obviously think they can get away with it by not doing too much of it... sounds to me like it could be a bit of a drug though.

It should obey supply and demand laws but they think that there is such oversupply of everything that the 'quantitative easing' will be soaked up by the extra stuff that's around rather than contrbuting to inflation immediately then hyperinflation pretty soon .....



There's no demand - isn't that it - and they want to stimulate demand. They say that lowering interest rates isn't enough (now at 0.5%) - it's like 'pushing on a string', just not working.

It'll be interesting to see what happens. They will pump 75bn into the economy over the next three months ( Guardian) which is like building 250,000 300k houses in three months or building 40 aircraft carriers or giving every man woman and child a cheque of £1200 or so. They're hoping this will (?) clear out inventory and eventually reboot the economy.

I don't know if they'll give money away directly but they could end up doing that - they've started doing that in some villages in Japan - they're giving out around $1000 to men women children.

Sounds very futuristic doesn't it? Sounds like something out of Star Trek but God knows what the upshot could be - it might work it might end in tears like Weimar or Zimbabwe.

On the other hand it could be seen as offsetting the over-value of UK mortgages - the extra value was a bubble like here which ties up capital in a long term loan. The money might be distributed with some relation to mortgaged people primarily - therefore people who were ripped off might get rewarded for investing in the first place.

The whole country is taking out a loan on the back of the boom it had as long as it doesn't have to import too much after the inventory is cleared then the UK might get away with it. If you look at the rapidity of how Weimar went to the wheelbarrow stage above it'll be interesting to see how it goes but I think Weimar was very different in that it had massive external loans to the allies and morale was extremely low. As long as the UK residents don't start seeing their own mortgages as being owed to 'external' bankers then Brown and Darling shouldn't fear for themselves.

Watch the shelves begin to clear out now.

Short answer - money is like any other commodity. If you increase supply, the existing stocks of that commodity decrease in value. The BOE hasn't been able to stimulate demand for money so it's trying the most extreme form of supply-side economics available to them.

The UK are not printing money because the price of goods have been increasing but because they are witnessing massive destruction of their capital base through bad debt write offs. They are most likely experiencing deflation on a wide scale. In this environment, their newly printed pounds will not have the same affect, according to theory, as it would if people were chasing a limited supply of goods and services. The average punter, due to uncertainty caused by job loss and the banking scandal, are finally resisting the urge to splurge. The average punter isn't taking out new loans or lines of credit, thereby diminishing monetary growth. Nor are banks willing to lend money on the old terms.

In an economy where 70%+ of money and new credit is created from private sector consumption, the UK would appear to be heading into a deflationary spiral as more and more people change consumption habits, if only temporarily. The second biggest spender and borrower is the UK govt. They've been doing their bit by borrowing funds and giving the money to banks, but the banks are loathe to lend in such a distressed environment. So the BOE have no option but to play with fire and print up a couple of pounds to distribute into the economy. Wouldn't you love to receive a portion of £75 billion - if only to exchange it for a more stable currency?

The immediate impact will be on those poor sods who have saved their hard earned money and lived comparetively frugal lifestyles. Yes, the supply of every new pound diminishes the value of all existing pounds. When we factor into the equation that no new or expected economic value* was created to theorectically back up the new pounds in circulation, you have an economic dillution of value. Also, one needs to consider the often poor returns, given the lowering of interests rates, that savers will experience to realise how badly the savers are being penalised for their past efforts.

From where I sit, this extreme measure taken by the BOE starkly exposes the fragility of the Western economic model (some would say the Anglo-American model) where the production of goods has largely been supplanted by the marketing and distribution of goods. In this model where workers would have been receiving incremental increases in income over time as the goods they produced added long-term value to the economy, they would have ideally been consumming and saving. Instead many jobs are in the service sector where wages are largely stagnant or the efforts required to produce above average wages require ever more time. The upshot is that the average worker has had to supplement their income with debt in order to maintain an acceptable ideal lifestyle.

* Theoretically, lending new money represents a productive use of funds that create future or immediate value in the economy.

Brilliant post rockyr., in my personal view. Do you have any thoughts about why the model (Friedman/Thatcher originated?) pushed aside the old industrial production/export one?

Has Germany stayed more with the old one? Why the difference?

Will be see western countries trying to pull industry back home, and is it too late?

All interesting questions Cactus. The problems of acquiring useful insights are compounded by the complexity of the global economic system and the stark lack of reliable data on GDP, employment and inflation indicators. (These numbers are not strictly statistical in many senses since they rely on mass collations of data rather than on strict statiscial inference. Statistical inference has been introduced as a methodology of obfustication in most instances.)

The knowledge economy, at least in theory, is one are for exploration. The Germans and Swiss, for example, have to some extent carved out niche production markets for themselves. They employ high-tech solutions to production in order to reduce wage costs. Where the Germans have maintained mass production processes such as in autos, they often targets market sectos where the people have money - ie the rich. Volkswagen on the other hand relies on quality production so sell fairly expensive middle of the road autos. So, it would seem the Germans have identified certain market sector in which an intelligent and motivated workforce can still make some profits. Every economic downturn, though, seems to leave them a little more exposed than before.

If you take the US model, where they claim that they are a thinking person's economy, you have entirely different results. The model, in theory anyway, stipulates that the Americans dream up new and innovative products. They do the design engineering and marketing. They find the lowest cost producers, (ie wherever labour is cheapest and industrial production is fairly advanced) and "off-shore" production. The upshot of this is what Taleb (black swan fella) calls scalability of incomes. The few who thinks up the ideas or innovations make a killing, money-wise. There is some money to be made in distribution and marketing, and hence the specialisation these field have undergone in the last half century. Meanwhile, back on the farm, millions of American workers have been left idle or, more correctly, left with not choice but to take fairly low-paid jobs in the service industry.

There are some notable US companies who have followed the German model and who are doing quite well, but they seem to be in niche markets where the economies of scale still operate to some extent. Farm machinery is one such example.

As for the UK. Yikes. There are some huge gaps in their production abilities and infrastructure. They have a real need to import some types of workers in production facilities simply becuase so many industries just no longer exist and the skills have disappeared from mainstream industrial production. They mopped up alot of excess labour units through employment in Construction, service industries and financial services. If you can't access employment in one of the industries, there are few alternatives and many aren't equipped with the skills to operate outside these industries anyway. There are some good niche companies and production facilities in the UK (or are UK owned) but not near enough, nor does it appear the govt is interested in promoting such industries.

I'm hearing that the Irish govt is actually going to put some effort into small and micro business start-ups. However, I was also told that no real funding (monetary investment) was going to be made available. However, its a step in the right direction.

johnfás wrote:

It is but they obviously think they can get away with it by not doing too much of it... sounds to me like it could be a bit of a drug though.

Do you think a certain amount of it can take place without the market noticing or reacting? Or is it just that the market reaction would not be too severe.

Thanks for that informative post Rocky.

What I seem to be getting is that
(a) when there is more money floating around people are more likely to buy, which is good for industry and enterprise and
(b) deflation is bad for the private sector so countering that by artificially inflating the currency could you call it that?) is good for the private sector which in turn is good for the economy.

Liquidity I suppose being the key word.

Could it also be said that, since so much money was "borrowed into existence" and then had to be written off when people realized it didn't actually exist, that the government is really just creating the money that the market already thought was there? Would that have any impact?

Also, presumably since printing more sterling lowers its value as against other currencies, would this have its own advantages on an international and transnational level? You know when you talk about countries devaluing their currency to help with exports, like Bertie did I think with the punt in the 90s, is this how they do it - or at least, would this be one way of doing it?

Is Britain turning into the new Zimbabwe?

Article in the Sunday Tribune yesterday by Hamish McRae who says interest rate decreases haven't worked which were a reaction to the UK economy slowing down chunk by chunk - house prices going down for example while shares prices simultaneously remaining buoyant up until recently. A bit like the coyote in Roadrunner continuing to run even as he had run out of road.



McRae is probably saying that printing should have happened earlier or at least interest rates should have fallen sooner although they did go down very quickly. And now that they've run out of stimulus with interest rates, there is still the most aggressive thing to do: print.

The article isn't online but it's worth a read. The conclusion he comes to about what will happen is this: no one really knows. He says that the UK won't really print money - not at firsanyway. He says the UK banking system is more sophisticated than Zimbawe's who have to resort to the printing presses straight away while the UK has other ways of increasing the money supply.

Banks on life support:

Quote :

The nature of lending to companies has shifted. Instead of lending going to support investment and property , lending has moved towards restructuring, So, voluntary borrowing - companies borrowing for expansion of some sort - has been replaced by involuntary borrowing - borrowing for survival.
...

Because the BOE has never done this before which ought to make people all feel uneasy, we don't know what will happen. The immediate reaction in the markets was that this will take pressure off the gilt market by making it easier for the Govt. to fund its deficit. I am not sure that will turn out to be true in the long term but it may help in the short.

Last week gilt prices soared. Does this mean the market thinks that this will be the British Govts. get-out-of-jail card?

I simply don't know and would not trust anything I am told.

When Ireland devalued the punt wasn't that a form of printing money in reverse? Or was it a way of suddenly getting at everyone's bank account?

I always thought devaluing a currency meant printing money? More in cuirculation, decreases the value etc.

shutuplaura wrote:

I always thought devaluing a currency meant printing money? More in cuirculation, decreases the value etc.

Very true - is that what we did back then ? You could be right but I think the Govt. might have sold their reserves of their own currency and bought another one or vice versa - they might have bought more punts using reserves of Sterling or gold if they had gold back then. That would have driven the price up. The article below also remembers how speculators ruined Sterling .... very intersting little blast from the past.

There was the Exchange Rate Mechanism in operation then - currencies could fluctuate within bands and when they approached the upper or lower limit of those bands then other mechanisms would kick in - the french or german banks would buy those pressured currencies or whatever.

I don't think they ever printed but I could be wrong. I don't see yet why the ECB doesn't print a certain amount for certain things - education or infrastructure. It would do this using strict rules e.g. a % of GDP or a country could trade live register numbers for some currency to train / offer education to those live register members. Education and training are often low-overhead exercises and the return could be a lot higher in the long run than the investment. If an economy is tilted so there is a slight over-production of the basics then some notes can surely be printed which avails of that excess of production. An extra few students can easily fit in a lecture theatre, there is plenty of rentable accomodation around now, food is plentiful, other basic items are cheap - the one thing is energy. They could get a part-time job for that though.

http://www.iht.com/articles/1993/01/08/fran_2.php

Just wondering this morning if the UK won't fare better out of this in the long run - I think it's a historic decision they've made, very courageous but potentially very destructive. It's an experiment of enormous proportions and of course they're full of arrogance about it. They have massive debt too and I wonder what's going to happen to this?

I've a feeling they'll survive this better than the rest and maybe even create a model for how the rest of the world should forge ahead. If they quantitative ease in a structured way then I don't see why it can't be very beneficial as long as their economy can sustain itself without an awful lot of imports .... Could they also come under attack from speculators ... ?

Again it will get down to energy at some level and here below Jim Rogers is talking about how their only exports - oil and finance are running thin on the ground. The UK has massive will and massive potential natural energy wave wind and all the rest. This stimulus if handled right could wipe smiles off a lot of faces.

Quote :

As for the ECB, it has not reached the starting line. Jean-Claude Trichet insists that there is no danger of deflation in Europe. What is the weather like on his planet, asked Mr Krugman.

The ECB has cut rates to 1.5pc, but since they need to be minus 1pc on the Taylor Rule, this leaves the breach as wide as ever. The Bundesbank is blocking any serious move towards quantitative easing.

Given that Germany's economy is imploding (Deutsche Bank sees 5pc contraction this year) one wonders if the Bundesbank would be less hawkish if the D-mark still existed. Even their hard-money brothers at Switzerland's SNB are cash printers these days.

So has monetary policy in euroland been paralysed by squabbles at a calamitous moment, blighting every member state? Almost certainly.

I'll take the Old Lady of Threadneedle Street any day, warts and all.

Ambrose Evans Pritchard, Telegraph